The chief UK strategist at JPMorgan's $1.7 trillion investment arm reveals her biggest fear for the British economy in 2018

Karen Ward, the chief market strategist for the UK and Europe at JPMorgan's $1.7 trillion asset management arm, believes that slow business investment could hurt the British economy in 2018.

Brexit uncertainty is stopping businesses from investing, which in turn, is stifling growth, Ward, a former key adviser to Chancellor Philip Hammond, said.

Ward stressed the importance of a transition deal "sooner rather than later" to protect the economy from uncertainty.

Broadly speaking, however, the UK economy is looking fairly solid, and things should "brighten" up by the end of the year.

LONDON — Lagging business investment caused by Brexit uncertainty will remain one of the biggest drags on the economy this year, according to one of the top strategists at JPMorgan's $1.7 trillion asset management arm.

Karen Ward, JPMAM's chief market strategist for the UK and Europe, said in an interview that while she expects the UK's economic picture to "brighten" by the second half of the year, but Brexit is one big blot on the landscape.

That uncertainty is set to continue, and will have a particular impact on investment, Ward said in an interview shortly after the release of JPMorgan Asset Management's quarterly Guide to the Markets.

"One area of weakness in the UK, certainly relative to what we're seeing elsewhere, is on investment. I think clearly the uncertainty with regards to the Brexit negotiations is playing a significant role there," she said.

"The question for thinking about activity throughout the year, particularly what happens to investment spending is whether the prime minister manages to capitalise on the momentum that she achieved in the final weeks of last year, and actually manages to move towards an agreement on transition."

"If we manage to agree a transition, that at least means for businesses, their hard stop for a change in relationship moves from March 2019 to further down the line.

"That will refocus their efforts back onto their day to day business, rather than the uncertainty of [what happens when the UK leaves the EU in] 2019."

"Businesses aren't going to feel really confident about significant investments, certainly long term investments, unless we get some kind of agreement and progression, not just on transition, but a movement towards some terms of what the final agreement will look like," Ward added.

Prior to the referendum, Ward worked as the chief European economist for HSBC, but left in October 2016 to become the head of Chancellor Philip Hammond's newly minted Council of Economic Advisers, effectively making her one of Hammond's closest confidants when it comes to economic policy. She then left that role in late 2017, to take up her current position with JPMorgan Asset Management.

While she believes transition will help to alleviate the negative impacts uncertainty is having on investment, and therefore economic growth, Ward also argues that its impact will be limited unless something can be agreed in fairly short order.

"The value of announcing that transition is near term. The closer we get to March, the less value that announcement serves. I think it needs to be sooner rather than later," Ward said.

"To get the maximum bang for the buck it [a transition announcement] it needs to go alongside some sort of, if not agreement on what the final relationship will look like, at least clear progression that there is common ground on certain issues and that the dialogue is constructive and amicable."

That views echoes many in the financial markets, some of whom have argued that the UK's failure to agree the terms of a transition deal before the end of last year will force major financial institutions to trigger contingency plans and shrink their UK operations, harming the country's macroeconomic future.

Jobs, companies, and capital are all expected to flee the UK, and potentially even Europe, unless a deal is struck soon, as companies need at least a year, and possibly as long as 18 months, to establish new subsidiaries on the continent that will allow them to continue operating across the bloc after Brexit.

A 'brighter' future for the economy

There may be the potential for a further slowdown in investment, but Ward believes that on a broad basis, the UK economy should be fairly solid in 2018, with improvements coming by the end of the year.

"I think by the second half of the year, things could look a bit brighter in the UK. Obviously the squeeze in 2017 was very much centred around the pressure on real wages, because inflation picked up and wage growth didn't go with it so you had this real acute squeeze on real wages.

"Sterling is up quite a significant amount — at least against the dollar — relative to where it was in 2016. That could mean that as we move through the course of the year, although I think it will take a while to see, the headline inflation figure should start to ease down, probably about the same time as we're seeing something slightly better on wage growth."

"We could see the real wage picture improve. That should see consumer confidence improve a little bit, and perhaps a little bit better retail spending and consumption will support GDP," she continued.

That might change in 2018, but only if a quick transition deal helps boost business investment.

"If we do move into this year and see some pick up in business investment as employment is stable, we could see some sort of recovery in productivity. That's one of the big themes we're talking about this year globally, because if productivity doesn't recover, we should be much more worried about inflation," Ward told BI.